Australian Innovation System Report 2017

In the last Quarter of 2017 the Australian Innovation System Report 2017 was released by the Office of the Chief Economist in the Department
of Industry, Innovation, and Science.

This year’s Australian Innovation System Report explores the businesses that succeed the most: “high-growth firms”. These businesses make an
outsize contribution to economic growth. The report quantifies the contribution of high-growth firms to the Australian economy and assesses
the role of innovation in their growth, and trends in the incidence and attributes of high-growth firms. The report explores the policy
considerations related to high-growth firms, and looks more broadly at potential areas for improvement in the general business environment.

High Growth Firms (HGFs):

Contribution to employment and revenue: Nearly half of Australian businesses are innovation-active; this innovation activity is distributed
broadly across all industries.

Employment and sales growth is concentrated in a relatively small proportion of high-growth firms (HGFs). Australian HGFs make a disproportionate
economic contribution. Between 2004–05 and 2011–12, firms with high-growth in employment (Employment HGFs) represented 9 per cent of all firms but
contributed 46 per cent of net positive employment growth. Firms with high-growth in turnover (Turnover HGFs) represented 15 per cent of firms, and
contributed about 66 per cent of the net positive sales growth and 69 per cent of the net positive value added growth, in the same period.

Firms with high-growth are found in all industries. On average, they are younger than other firms — typically aged less than eight years. Between 2002 and 2013, their median capital expenditure was 65 per cent higher and they showed a notably larger increase in annual labour productivity
growth compared to other firms.

The lack in persistence of high rates of firm growth over time reported in international studies is also evident in Australian firms. Most Australian HGFs will conclude their high-growth episode within four years.
In general, HGFs do not appear to be a type of firm, but rather a phase that some firms go through during their life cycle

The proportion of HGFs in the Australian economy has declined. Between 2005 and 2014, the proportion of firms with high-growth in employment
declined from 18.6 per cent to 12.5 per cent, and the proportion of firms with high-growth in turnover declined from 17.6 per cent to 14 per cent.

These firms have generally become larger in terms of their annual sales revenue. In 2014, the median turnover growth rate of firms with high-growth in
turnover was 38 per cent and the median firm in this cohort recorded almost $184 million in sales revenue that year. By comparison, in 2006, the turnover
growth rate of these firms was 68 per cent and their median annual sales revenue around $116 million

Innovation:

Australia has a high proportion of innovation-active firms by international standards. In 2015–16, a 48.7 per cent of all employing firms were innovation-active.
These firms are distributed broadly across industries, with the highest proportion found in Manufacturing.

Australian innovation-active firms overwhelmingly specialize in modifying innovations introduced by other Australian firms but are not particularly strong
at introducing new-to-market innovations. In 2015, Australia ranked 23rd of 31 OECD countries for the proportion of firms engaging in new-to-market
product innovation.

Business collaboration on innovation is generally low in Australia. Across a range of collaboration metrics, Australia typically sits in the bottom half
of the OECD.

Australia’s level of entrepreneurial activity is amongst the highest in developed economies. Around 14.6 per cent of the Australian adult population (18–64
years) were actively engaged in starting new businesses in 2016, representing 2.2 million early-stage entrepreneurs.

Policy implications:

The Office of the Chief Economist in the Department of Industry, Innovation, and Science drew the following implications for policymakers:

Underlying policy should continue to focus on creating a macroeconomic environment conducive to innovation and growth by improving framework conditions.

Increasing the depth, breadth and relevance of skills available, particularly to smallfirms, could strengthen Australia’s ability to capitalise on
innovation.

Australia has a strong regulatory environment, however there are opportunities for further reform. Maintaining relevant competition policy can encourage
levels of competition that promote innovation.

Improving access to finance, particularly for innovation-active SMEs, would further support the growth of innovative and disruptive firms.

Australia’s successful adoption of digital technology is likely to be fundamental in boosting productivity growth and maintaining global competitiveness.
Policy settings and increasing the availability of skills will be important in this area.

The themes of the Australian Innovation System Report are evident in the ISA Prosperity through Innovation 2030 statement.